woman with red beanie thinking about paying off student loans

A MoneyTips Guide To Paying Off Student Loans

tl;dr

What You Need To Know

  • When it comes to paying off student loans, you’ve got options (like consolidating or refinancing to lower your interest rate)
  • The average repayment term for most student loan debt is 20 years
  • The amount of interest you pay varies depending on whether your student loan is federal or private

Contents

Show of hands if you’ve heard this before: “Your college years are the best years of your life!” Looking back at that time – and ahead to life in “the real world” – you might start feeling nostalgic, especially when those student loan payment notifications kick in (on top of all the other costs of adulting). You may be left to wonder if that summer abroad was really worth the 30-year repayment plan you signed up for.

Student loan debt can create a serious sense of financial insecurity, discouraging or preventing you from other (expensive) major life investments, like homeownership or getting married. Well, stick with us. We think this MoneyTips guide to paying off student loans will take some of that stress away, offering insight into student debt and helping you figure out your best repayment strategy.

Types of Student Loans

There are three types of student loans: private, federal and refinance loans (available after graduation). You might have a combination of these loans.

Most students get federal loans. Private student loans are useful for specific circumstances, such as covering costs associated with the bar exam or to support international students.

Types of federal loans include:

  • Direct subsidized and unsubsidized loans
  • Perkins loans
  • PLUS loans

Types of private loans include:

  • Bar exam loans
  • Credit union loans
  • Medical school loans
  • International student loans

Refinance loans become an option after you’ve graduated and started paying down your debt. Essentially, a new lender pays off your existing loan(s) and provides a new repayment schedule at a different interest rate.

How To Pay Off Student Loans

Whether your goal is to pay off student loans quickly or in a way that is manageable for your financial situation, paying close attention to your repayment strategy (and making the appropriate adjustments) can help you stay on track.

Paying off student loans takes time, dedication and plenty of strategizing. One way to pay off student loans includes making larger payments than the required monthly payment. It will cover the minimum, the added interest and more.

Refinancing student loans can consolidate multiple outstanding loans, providing you with a lower interest rate and new payment schedule. If larger payments aren’t an option for you, an income driven repayment plan may be the key to making paying off your student loans easier.

The amount of time it will take you to pay off student loans depends on how much debt you’re juggling and your repayment term. The average repayment term for most student loan debt is 20 years. But other factors play a role in this timeline, such as whether you refinance your loans or consolidate debt. These options can shorten or stretch the length of repayment.

Grace Periods

Good news! Post-graduation, you get some breathing room to figure out the whole adulting thing and how your student loans fit into the picture. It’s what’s known as a grace period. Grace periods typically last up to a year after your graduation date. With grace periods, interest may still be added to your balance, but monthly payments aren’t expected or penalized during this time. So, if you have some extra money, it doesn’t hurt to start making payments right out the gate.

Student Loan Interest And How it Works

Speaking of interest, how does it work? Interest is a charge for the privilege of being able to borrow money. Basically, it’s how the lenders – both federal and private – make their money. You’ll see this as a percentage (called APR), and it applies to the total amount of debt owed. It’s not a random number – Congress determines the interest rate on federal student loans (which is subject to change each year).

Private loans may offer higher interest rates, as they have more control over fluctuating rates. Interest rates are determined by market factors as well as personal variables specific to the borrower, including credit, income and employment history. Other factors to consider when it comes to private loans are whether interest adds up over time (accrual) and the defined payment schedule.

For perspective, in 2019-2020, undergraduate students paid 2.75% interest on all Federal Direct Stafford loans while graduate students paid 4.5% interest on federal loans.

Some private loans could run up as high as 12%, making them much less favorable than the federal options. But sometimes a private loan can be eligible for a lower interest rate that is competitive with a federal loan, which would lower your monthly payment. And that’s the goal, right?

What Are Student Loan Suspensions?

Student loan suspensions halt all expectations for payments – for a certain period of time, that is. It might also be called loan forbearance. This is neither loan forgiveness nor a long-term solution.

Think of it as a temporary break or some time apart. You know, like that break with your partner in the second semester of your junior year. The only difference is that the loan break has an actual restart date.

Under most circumstances, loan forbearance will still add interest to your amount owed, but there are instances when this may not be the case – like when the government suspends your federal student loans.

Just like other aspects of life affected by the pandemic, student loan payments have been on hold since March 13, 2020. Interest and monthly payments on federally held student loans are on hold until January 31, 2022.

That means that you don’t have to pay your federal loans and they aren’t earning interest during this period. Unfortunately, private loan holders aren’t eligible for this suspension.

What Is Student Loan Deferment?

Life happens sometimes and, depending on your financial situation, student loan payments may be hard to make. Thankfully, there are options to keep your credit score intact and put student loan payments on hold. You can defer your loans or put them on hold until you’re able to afford payments again. When it comes to this option, your loans will still be earning interest, so you may be better off considering an income-based repayment plan.

Is Student Loan Forgiveness Possible?

For some people, yes, loan forgiveness is possible. Student loan forgiveness wipes away all or a portion of a loan, meaning you’re no longer obligated to pay back the amount forgiven. However, depending on how the loan is forgiven, there may be tax consequences. It’s worth seeking advice from a qualified tax professional to see if it’s a smart move for you.

Paying Off Student Loans: Is There a Faster Way?

You’ve probably been trying to figure out how long it’s going to take you to pay off those student loans and if there’s a faster way. Unfortunately, there is no one-size-fits all solution.

  • Should I get a personal loan to pay off the debt I built up as a student? Sure, it’s an option. But be wary of the drawbacks of paying off your student debt with a personal loan, including higher interest rates and a shorter repayment cycle.
  • Should I get a personal loan or balance transfer to pay off student loans? In most cases, moving student loan debt over to a credit card isn’t a smart move. Even if your credit card lender allows you to balance transfer debt, if you don’t qualify for an introductory 0% APR, you’ll be paying a soaring interest rate of 15% or more! And don’t forget, 0% APRs usually last between 6 to 12 months. If you are unable to pay off your debt before then, you’ll be charged interest rates at a rate that’s probably higher than your initial loan.

Student Loans: A Necessary Evil

While you might spend your first few adult years wondering if all these student loans were worth it, you’ll realize how beneficial they were in the long run. It may feel like a long way away, but completely paying off your student loans is possible. It all depends on finding the solution and payment plan that works best for you.

#icymi

In Case You Missed It

Take-aways

  1. There are three types of student loans, each with their own benefits and regulations
  2. You can take advantage of interest-free payment periods to save money and pay off your loans faster
  3. You have options if you need to pause your student loans. Do your research to find out what makes sense for you

You Should Also Check Out…